RALEIGH – North Carolina’s auto insurance market does not work. It undercharges many bad drivers and overcharges nearly all of the best drivers while guaranteeing profits for insurance companies. That’s the assessment of a new John Locke Foundation Policy Report.
“North Carolina’s system is unjust, expensive, burdensome, and needs to change,” said report author Eli Lehrer, senior fellow at the Competitive Enterprise Institute in Washington, D.C. “By any legitimate measure, it is the worst in the country.”
In a report released earlier this year by the Heartland Institute and the Competitive Enterprise Instutitute, Lehrer gave North Carolina’s system an “F” — the worst possible grade.
The most important flaw in the system is a “teenager tax” — which adds an average of 6 percent to the average auto insurance policy in order to subsidize rates for many of the state’s riskiest drivers, Lehrer said. “That hidden tax penalizes the state’s safest drivers, including women and older drivers,” he said. “The tax is linked to the fact that nearly one out of every four North Carolina drivers cannot find insurance coverage in the private market.”
That’s an enormous number compared to other states, Lehrer said. “North Carolina has only about 3 percent of the nation’s population, but 60 percent of the country’s drivers insured outside of the private market live here. That’s insane.”
The entire system exists as a result of a rate-making process that ranks as America’s most complex and bureaucratic. “This system is inflexible and resistant to innovation,” he said. “A lot of products North Carolina consumers might want — rebate checks for safe drivers and pay-per-mile auto insurance — simply aren’t sold in North Carolina. Although no law explicitly prohibits these products, the sheer burdens of the state’s rate approval bureaucracy make it very unattractive for insurers to offer them here.”
For all its complexity, North Carolina’s auto insurance system seems to do little for the state’s residents, Lehrer said. “North Carolina’s auto insurance rates are about typical for the Southeast and for states of its size,” he said. “That might sound good, but residents of some nearby states like Virginia and Tennessee spend less on auto insurance relative to their income than do residents of North Carolina.”
North Carolina’s system guarantees profits to private insurers, Lehrer said. “Any insurance company unsure about its ability to profit on a certain driver can always play it safe and hand the driver over to the state-mandated insurance pool, known as the Reinsurance Facility,” he said. “Although insurers that give up polices can’t make any profits off of those, they can still maintain business relationships — their names appear on policy statements, and their agents and adjusters service the policies — and sell consumers other products like homeowners’ and life insurance.”
A better system requires some reforms, Lehrer said. “North Carolina could repeal the ‘teenager tax’ added to every policy in the state,” he said. “The state could also let higher-risk drivers purchase insurance at rates lower than Reinsurance Facility rates if companies are willing to offer those lower rates.”
“North Carolina could also allow insurers to make use of a wider range of information in classifying risks, such as the driver’s gender and age,” Lehrer added. “The state could also speed the approval of new insurance products.”
In the end, Lehrer argues, the state would do best to ditch the entire system and allow market forces — rather than government bureaucrats — to set rates.